Cross-currency movements also favour higher dollar revenues, but increased manpower costs could result in a decline in margins
The information technology (IT) sector should put in a positive performance in the June quarter, as the demand landscape remains unscathed and user spending continues to be broad-based, says Angel Research. Besides, cross-currency movements favour growth in US dollar revenues and a surge in overall revenues. However, there could be a possible decline in margins on account of increased manpower costs, as well as an overall slip in earnings of the order of 7% to 9% for the market leaders or even higher for smaller companies.
The demand environment for most Tier-I IT companies is marked by positive client budgets across industries, with the exception of telecom, a higher component of offshore assignments for clients, an ability to satisfy surging demand with upbeat gross hiring guidance for 2011-12. (Infosys and Tata Consultancy Services say they are adding 45,000 and 60,000 employees respectively.)
In spite of the favourable environment, there is a cause for concern in the looming macro economic scenario that may see a delay in client projects. The pent-up budget flush is not happening as planned, because clients are turning marginally cautious about the economic recovery. However, there are no indications of any budget cuts from clients yet and IT companies continue to see robust demand for discretionary services going ahead.
Recently, Gartner Information Technology Research revised its growth on IT spending for 2011-12 from 5.6% year-on-year to 7.1% y-o-y.
As per NASSCOM's strategic review in February 2011, worldwide IT spend is expected to grow by about 4% in 2011-12. As for industry-wise trends, the BFSI (banking, financial services and insurance) segment that contributes about 45-50% to exports, will continue to lead in terms of volume due to persistent work related to regulatory compliance, data analytics, operational efficiency and risk and fraud prevention issues.
Sharekhan also has a positive demand outlook for the IT sector over the next 12 months. It says that despite the macro-economic headwinds, mainly the slow recovery of the US economy and the European debt crisis, the demand environment remains strong, with higher client spends towards regulatory changes, higher globalisation and newer technologies like cloud and analytics.
One example is Oracle, which has reported strong new licence sales (up 19.2% y-o-y to $3.74 billion) that would have a multiplier effect on the market for Oracle-based assignments.
However, negative news flows and disappointment over quarterly performance would impact stock performances. Sharekhan expects Infosys to have a negative q-o-q growth of 4.1% in net profit (Rs1,743 crore) in the June 2011 quarter. It also expects Tata Consultancy Services to announce negative q-o-q growth of 5.9% in net profit (Rs2,260 crore).
Motilal Oswal Securities (MOSL) believes the demand in the IT sector is fundamentally intact from the near-term perspective, and it has revised its estimates only marginally. Increased rhetoric around visa issues and the macro slowdown in the US are negative factors affecting market sentiment.
Visa issues have not impacted operations of most Indian IT companies in any material way, as increased scrutiny is an ongoing feature of the US visa process. Deal pipelines in terms of volume and size remain strong and demand is getting broad-based, as lagging verticals like manufacturing show improvement. Infosys registered a net profit of Rs6,800 crore in 2010-11, while TCS recorded a net profit of Rs8,700 crore.
Macquarie Research believes that revenue growth in 2011-12 could trigger margin expansion from the 2010-11 level. These companies have faced wage inflation and rupee appreciation last year, and with robust demand they should be able to reverse the profitability trend seen last year.
But IDFC Securities sees divergent trends among the top four companies. TCS could achieve the highest q-o-q US dollars revenue growth of 6%, while HCL Tech could grow at 5%, Infosys at 4% and Wipro 2%. The revenue growth is to be largely volume driven with some pricing improvement.
On the contrary, q-o-q margins are to decline largely on the back of wage hikes and visa costs. The decline in margins for the market leaders includes Infosys 270 basis points, TCS 210 basis points, and Wipro 40 basis points. The exception is HCL Tech, which will achieve 70 basis points margin expansion led by offshore shift and no wage hikes.
According to Nomura Equity Research, the IT industry will witness revenue growth of 2% to 8% in the first quarter of 2012, and decline in margins due to impact of wage hike, with the exception of HCL Tech. The factors which lead to this performance include the impact of macroeconomic deterioration on demand and the outlook for Indian IT companies; shifting of client spending priorities toward discretionary spending; continuation of positive pricing momentum; and the impact of an increase in visa rejections on revenue growth and margins.
Overall, as per the estimates/projections of leading broking houses, we can expect the news from the IT sector to cheer investors over 2011-12.
The labour ministry had opined that if employees' provident funds are to be ploughed into the stock market, the government has to provide a guarantee regarding the safety of the workers' funds and a reasonable rate of return. However, the finance ministry stated that the government cannot stand guarantee to the EPFO investment in the share market
New Delhi: Amidst a debate in the government over investment of employees' provident funds (PF) in the stock market, former Reserve Bank of India (RBI) governor Bimal Jalan cautioned that any such move will have to be backed by a government assurance for making up for losses, reports PTI.
"If it (PF) is invested in equity, there should be backing with government assurance that in case of any shortfall, the funds will be provided by the managers," the well-known economist told PTI.
He said these funds can be invested in equity, provided "we have sufficient resources to be able to weather fluctuation of at least 10% in the stock market."
Mr Jalan's views are consistent with the stand taken by Employees' Provident Fund Organisation (EPFO) that it was not in favour of investing a part of its Rs3.5 lakh crore corpus in stocks as proposed by the finance ministry.
"... if the investment in the capital market is so good, then there should be no problem for the government to provide a guarantee regarding the safety of the workers' capital funds and a reasonable rate of return on the capital," the labour ministry had opined.
However, the finance ministry had made it clear that the government cannot stand guarantee to the EPFO investment in the share market.
"There is no question of government providing the sovereign guarantee to any provident fund... The government gives no guarantee of safety of returns to any provident fund," it had said.
Recently Securities and Exchange Board of India (SEBI) chairman UK Sinha also batted for investment of the EPFO funds into the equity market.
"India is perhaps the only significant country where there is a prohibition that workers' money cannot be invested in the market. I have not seen any other market where workers' money is prohibited by regulation," he said.
The move could put USE in direct competition with BSE, but its managing director and CEO TS Narayanasami said that the bourse would make sure not to rub shoulders with its larger rival BSE, which also happens to be its largest shareholder
Mumbai: The country's newest bourse United Stock Exchange (USE), currently offering currency futures trading only, is looking to soon enter new segments such as equities and interest rate futures to expand its business and profits, reports PTI.
The move could put USE in direct competition with Bombay Stock Exchange (BSE), but its chief said that the bourse would make sure not to rub shoulders with its larger rival BSE, which also happens to be its largest shareholder.
"Yes, it is true that we have to enter more segments of trading, which is in fact a natural business progression," USE managing director and CEO TS Narayanasami told PTI.
He, however, added that USE was yet to approach its board with any such plans.
Currently, BSE and NSE (National Stock Exchange) are the only two major national stock exchanges providing equity trading, while two others, USE and MCX-SX are only present in currency futures market.
BSE withdrew itself from currency futures in favour of USE, while NSE is present in virtually all the segments.
The issue of competition in stock exchange arena has become a hot topic of debate and the Competition Commission of India (CCI) recently slapped a Rs50 crore penalty on NSE after finding it guilty of abusing its dominant market position.
In its order, which followed a probe conducted by it pursuant to a complaint filed by MCX-SX, the competition watchdog also asked the NSE to immediately stop subsidising its products in currency derivatives market and start imposing a transaction fee.
Welcoming the CCI move, Mr Narayanasami said there has to be a revenue model for any business and it was good that some transaction fees are charged, especially for those entities which have only single-source revenues.
Noting that USE needs to diversify, he said: "We will ensure that there is no conflict of interest with the BSE, as and when we decide to enter new segments.
"After all BSE is our largest shareholder with 15% stake and we have no plans to antagonise them," he added.
He also noted that it was "a very delicate issue, since BSE had shut their currency business when they picked up stake in us. We have to respect that decision".
Mr Narayansami's comments come in the midst of rumours that BSE might sell its 15% stake in USE, following which the two would compete in all the market segments.
Mr Narayanasami also scotched rumours about any plans to leave USE and said that there was "no basis for such reports.
They are all sheer rumours. I am very much with the exchange and have great plans for it as of now."
Asked whether as the CEO he supports USE entering the equity space, Mr Narayanasami said, "Yes as a natural course of our business, but everything depends on the board decision."
On whether BSE could sell its stake, he said: "Never, not at all."
When contacted, a senior BSE official also said that the premier exchange had no plans to exit USE.
"They (USE) have given us tremendous return on our investment. Why should we quit a venture that is giving us high returns and also has higher potential to deliver more?" said the BSE official, who did not want to be identified.
On the business strategy for USE as it completes the first year of operations in mid-September, Mr Narayanasami said, "Over the past 10 months we have consolidated our position in the market with our volume share touching 26%. My target is clutch at 30% market share by September."
As on June-end, USE had 21.65% of the volume, while NSE had 42.75% and MCX 35.06%, according to the data available on their websites.
This is a major jump for USE from March, when it had just 10.40% of the market, while MCX-SX was on the top with 46.26%.
USE had recorded largest number of contracts on the first day of trading with a 52% market share. It operates on four currency pairs against the rupee-the US dollar, the euro, the pound and the yen.
On the new business areas that the company is looking to enter, USE's president for marketing and business development Saurabh Arora said they will approach market regulator Securities and Exchange Board of India (SEBI) to seek permission for entering interest rate futures segment.
"We are filing for application for interest futures shortly. We already have the board approval for this," Mr Arora told PTI.
Mr Narayanasami said that as the market matures, USE intends to launch other currency pairs and it already has the SEBI approval to commence currency options.
While BSE is the largest investor in USE with 15% stake, its other shareholders include leading banks like Axis Bank, Federal Bank, HDFC Bank, J&K Bank, Yes Bank, ICICI Bank, Standard Chartered and corporate entities like Jaypee Capital, MMTC and Indian Potash.